Mutual Fund Unlocked: Floater Fund

Mutual fund investor who don’t want to take much risk usually looks at the debt funds as the safer investment avenues. Post categorisation and reclassification, the arena of debt funds have been revived. Out the debt fund basket, floater fund is one of the lesser known mutual funds.

The floater fund is the fund which invests into the financial instruments which pay variable or floating interest rate. The key advantage of these funds is its lower degree of sensitivity to the changes in the interest rate as compared to the funds or instruments which provide fixed payment rate. These funds appeal to investors in a rising interest rate environment.

Floating rate funds seems to be an attractive option for the risk-averse investors to add to fixed income portion in their portfolio. These funds can hold many types of the floating rate debt instruments including bonds and loans. Strategies of this fund include credit quality and duration. The rates payable on a floating rate instrument fluctuates in line with the defined interest rate level, so these funds are less sensitive to duration risks.

Apart from the lower sensitivity, floating rate funds aid investors to diversify from the fixed-income investment. Another benefit is that these funds help investors acquire a diversified bond or loan portfolio at a relatively low investment.

While evaluating a floating rate fund, investors must look at the securities which the fund holds and should ensure their risk tolerance capability. Even though these funds are less riskier than the equity funds, they are not risk-free investment. These funds carry moderate risk, so investors should be aware of this while investing in these funds.